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After Buying a Franchise, Two More Families Facing Bankruptcy

Another day and two more prospective clients calling for help because they bought franchises. One in the senior health care industry; one in the men's hair care industry. Both suffered devastating losses. In under two years, one lost $600,000; the other "only" $100,000. In both cases, they have nothing left and I had to talk to them about consulting a bankruptcy attorney.

Over the 35 years I have been representing franchisees, I have observed the chances of a franchisee of any brand surviving for five years decrease dramatically. Academic studies show that the chances of a franchisee failing within five years are approximately equal to the risk of failure of independent small businesses-about 85 percent. For smaller less established franchises (in business less than ten years and having less than 100 franchisees), I have observed that their franchisees' risk of failure is greater than 90 percent. In some systems, the failure rate hovers just below 100 percent.

In my view, this has happened because franchising has lost its focus and its soul. Historically, franchisors understood that their most valuable asset was their franchisees and treated them accordingly. Franchisors went to great efforts to make sure that their franchisees were successful and tied their success to the success of their franchisees. That has changed.

Modern franchise agreements no longer tie the success of the franchisor to the success of its franchisees. Instead, the only enforceable promises the franchisor makes are to let the franchisee get a few days of training and permission to use the trademark. Increasingly, if the franchisee gets any other assistance in their business there is a separate fee. In fact, if you add up all the "nickel and dime" fees and convert them to a percentage of revenues, many franchises approach 20 percent or more in what used to be called "royalties." Franchisees, especially franchisees who are pioneering an unknown brand, find themselves unable to compete against independent businesses that don't face the high fees.

The big picture is much more complicated than can be addressed in a short blog, but the point here is simple: Until the franchise industry changes and realizes it is burning its most valuable assets in search of short term profits, people considering buying a franchise need to protect themselves by not signing franchise agreements without first spending valuable time and money consulting an experienced franchisee lawyer. It can save you a bankruptcy; in fact, in many cases a 90-plus percent chance of bankruptcy.

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